Alibaba (BABA 0.19%) shares weren't able to gain much traction following its fiscal Q2 results (ending Sept. 30), even though the company saw strong revenue growth in both its e-commerce and cloud computing segments. The stock, however, has had a strong year, up about 85% year to date, as of this writing.
Let's dig into Alibaba's most recent earnings report and prospects to see if investors should buy the stock or take some profits.
Image source: Getty Images
AI momentum continues
Alibaba's cloud computing business once again saw its revenue growth accelerate, driven by demand for artificial intelligence (AI) products. Its cloud intelligence revenue grew by 34% to $5.6 billion, outpacing the 26% growth it saw in fiscal Q1. AI product revenue more than doubled yet again. The segment's adjusted EBITA (earnings before interest, taxes, and amortization), meanwhile, jumped 35% to $506 million.
The company said that demand is currently outstripping its capacity and that it may need to increase its current capital expenditure (capex) budget to meet growing customer demand. However, it said that supply constraints could impact its ability to ramp up its AI infrastructure spending.
Alibaba's largest business remains its e-commerce operations. Its two primary retail platforms are Tmall, which serves established brands and is similar to Amazon's marketplace business, and Taobao, which allows both brands and individuals to sell on its platform. Increased competition and a struggling Chinese consumer put pressure on Alibaba's e-commerce business, but it has been investing aggressively to help drive growth.
This could be seen in fiscal Q2 results, as its e-commerce revenue climbed 16% to $18.6 billion. The growth was led by a 60% surge in quick-commerce revenue to $3.2 billion, which is its efforts to deliver goods to customers within an hour. The company's important third-party business revenue increased by 10% to $11.1 billion, while direct sales rose 5% to $3.4 billion and wholesale sales jumped 13% to $947 million.
However, its investment in quick commerce led to a 76% drop in segment EBITA. The company said, excluding these investments, that the segment would have grown its EBITA by mid-single digits year over year. The company plans to aggressively invest in quick commerce at the expense of profitability over the next few years, as it sees real scale and synergy benefits with the rest of its ecosystem. It is looking to grow its quick-commerce gross merchandise value (GMV) to 1 trillion yuan ($140 billion) in the next three years.
The company's international commerce segment (AIDC), which includes AliExpress, meanwhile, also had a solid quarter, growing its revenue by 10% to $4.9 billion. Importantly, the company made good on its promise of flipping the segment to EBITA profitability, with it coming in at $23 million.
Overall, Alibaba's revenue rose by 5% to $34.8 billion, but it increased by 15% when excluding dispositions. Adjusted EBITA plunged 78% to $1.3 billion, while its adjusted earnings per American depositary share (ADS) sank 71% to $0.61.
Its operating cash flow dropped 68% to $1.4 billion, while its free cash flow was an outflow of $3.1 billion due to its investment in quick-commerce and AI infrastructure.
Alibaba ended the first half of its fiscal year with $46.1 billion in cash and short-term investments and $39.5 billion in debt. It also had $57.8 billion in equity and other investments on its balance sheet.
NYSE: BABA
Key Data Points
Time to take some profits
Alibaba is at an interesting intersection right now. Not long ago, it was a very cash-rich but slow-growth company that was generating strong free cash flow. Now it's growing its revenue much more quickly, but it's also investing heavily, which is leading to it burning cash and its profitability falling off a cliff.
This is not necessarily a bad thing if these investments pay off, but the company is staking a lot on its quick-commerce initiative, and to a lesser extent, its spending on cloud computing. The good thing, though, is that the company has shown that it can turn a period of heavy investment into eventual profitability with its AIDC segment.
Turning to valuation, Alibaba stock trades at a forward price-to-earnings (P/E) ratio of about 16 times fiscal 2026 analyst estimates. That's a much higher multiple than in recent years, but it's still not outrageous.
However, with the stock and its valuation up a lot this year, and it clearly being in investment mode for the next few years, I'd be looking to take some profits at current levels.
